Economy in Brief

The German research house Zew has updated its monthly poll of members which shows little change in current conditions, some small improvement in still very-weak expectations, perceptions that inflation is still well corralled, and the view that lower rates in the US are more likely, while less likely in the Euro-Area (but still very likely everywhere!).

Macro conditions and expectations Zew experts see no change in the current situation in the Euro-Area in June, a small step back for Germany and a step back in the US. Still, US conditions have a queue standing of 54.5%, above their historic median while the Euro-Area’s weaker standing is at its 41.2 percentile, Germany is still viewed as much weaker with a 15.9 percentile standing in its current conditions metric. Expectations reverse those queue standings as Europe improves expectations slightly in the month to a 69.3 percentile standing, well above its historic median. The US marks a 4.5-point improvement month-to-month but still logs a net negative assessment and sports a below-median queue standing in its 37.8 percentile.

Inflation and interest rates Inflation expectations remain deeply negative as inflation is broadly and intensely viewed as not a problem. The queue standings for the inflation readings range from a 7.4 percentile standing low in the US to a ‘high’ standing at 15.9% in Germany- the EMU reading is below the German reading. Not surprisingly, interest rate expectations are broadly negative across short- and long-term rates. Expectations for lower US short term rates rose this month while for EMU expectations were reduced. Still, we are splitting hairs here with 5-percentile and 6-percentile standings for each of them- both extremely low. Long-term rate expectations follow the same pattern, with lower US rates expected- not so for EMU. Both queue standings are exceptionally low at a three-percentile standing for EMU and at a 0.8 percentile standing for the US. We simply have rarely seen expectations so weak for long-term yield reduction in either the US or EMU.

Stock market expectations show below-median values for all three areas: EMU, Germany, and the US. The US queue standing evaluation is the highest at a still below-median 40-percentile standing while Germany and the Euro-Area had standings in their ‘teens.’

The current situation in EMU and Germany has remained depressed since Ukraine invasion. Europe and Germany came out of Covid with the same initial vigor as the US, but then both suffered relapses as the Russian war on Ukraine emerged. The US regather momentum to work higher from mid-2022 while Germany and EMU have been unable to mount a sustainable reaction. Inflation expectations have gradually ‘risen’ from deeply negative values and remain still very weak at large negative values. There have been no significant changes to interest rates or inflation expectations, just very slow-moving changes.

With central banks moving rates slowly no one seems to be expecting anything to change abruptly anytime soon. Perhaps if there is a sharp change in the works it will come from some unexpected geopolitical event, but even the shock attack on Israel by Hamas and the Israeli response have had minor impact on markets and on economic expectations...so far.

The new data today from Japan are for orders and these are presented at the bottom of this table. Total orders fell by 3.6% in April with core orders (those being the series excludes large projects such as ships and electric power plants) falling by 2.9% month-to-month. Foreign demand was the only category that rose on the month, it was up by 21.6% but that's following the only decline from March when foreign orders fell by 9.4%. Domestic demand fell by 15.1% in April.

The ranking of the levels of the indices for orders are relatively high with core orders being the weakest at 85.8 percentile standing the rest having standings above the 90th percentile. However, over time and with inflation orders should grow so it might be more meaningful to look at the growth rank and on that basis core orders have a 44.8 percentile standing the growth rate rank, below its median - the median for ranking statistics occurs at the 50th percentile. However, in terms of growth rankings total orders, foreign demand, and domestic demand, all have standings from the mid-70th to low-80th percentiles which are quite solid metrics.

Beyond Orders Other metrics in the table also assess the performance of Japan's economy in various ways. The first block in the table considers the economy watchers’ index. These diffusion indices are largely below scores of 50, indicating contraction for these survey items. In terms of rankings, the growth ranking for the economy watcher components are all quite weak - all below their 28th percentile in terms of levels- and these are more meaningful since these are diffusion indices. Eating and drinking and service sector indices have standings above their 50th percentile, but the rest are below the 50th percentile indicating performance for these sectors below their respective historic medians.

The Teikoku surveys also employ diffusion indices. They are slightly weaker in their diffusion values than the economy watchers’ numbers. The rankings of the Teikoku diffusion indices in terms of index levels are all over the map, with manufacturing extremely weak, at a 35-percentile standing, and services at the other extreme, strong with an 80.7 percentile standing. In terms of the growth rankings all of them are weak with construction as high as a 38-percentile standing but after that nothing as high as a 32nd percentile standing.

The METI tertiary index moved up in April to 101.9 from 100 in March. It has an index standing at its 85th percentile and growth standing at its 66th percentile, both above their medians. For industry we use the industrial production index which dips in April compared to March. It has an index rank that's low at 6.8% and a growth rank that's only at 12.8%. The weakness in industrial production reinforces the weak reading we see on manufacturing in the Teikoku survey.

Japan's leading economic index in April ticks down slightly to 111.6 from a 111.7; that index has a ranking on its level at its 59th percentile and a growth ranking at its 74th percentile both mildly firm entries.

Against the background of the surveys in the table, the orders responses in April show standing growth rates and order index levels that seem relatively stronger than some of the responses from the surveys in the table above. However, there's little indication according to any metric in the table there's much strength in Japan's economy, in the manufacturing sector, or across the service sector entries. The far-right hand column simply looks at changes in the various indices from January of 2020 when COVID struck. Recognizing that these are changes over a four-year period, they indicate a good deal of weakness across the Japanese economy. Against that background the orders data have better responses than the surveys.

Still, the bottom line for Japan is that the economy is struggling, and the Bank of Japan is still trying to feel its way with policy being somewhat hesitant to raise rates too much despite excess of inflation because it's unsure whether the inflation is going to stay; the BOJ is still being very mindful of the long period of deflation it hopes it has put behind it. The sharp weakness in the yen that has developed this year is simply another policy challenge for the Bank of Japan and so far, this yen weakness has not particularly ignited either domestic growth or domestic inflation. But it has contributed to the increase in the price of energy and that has created some consumer distress.

Industrial output in Japan foundered drooping by 1.2% in April, with manufacturing output declining by 0.9% on declines spanning consumer goods, intermediate goods, and investment goods. Mining and electric and gas output fell in the month as well. Declines spread across all of manufacturing and all the major industrial production sectors. The textile industry managed a month-to-month rise.

In recent months manufacturing output and overall industrial output have both been up and down by month. Sequentially, output may have broken out from a weak trend. Over 12 months output fell by 4%, over 6-months it fell at a 7.3% annual rate, but over 3-months overall output is up and 11.5% annual rate, a strong showing. Manufacturing output fell by 4.3% over 12-months, it fell at the 6.8% annual rate over 6-months and then surged at an 11.9% annual rate over 3-months. And while these patterns are encouraging, the impact on year-over-year growth has only been to stabilize output at around the -4% mark of contraction.

By sector, consumer goods output continues to be weak but has trend with some of its weakness back. Consumer goods output falls by 4% / 12 months falls at a stepped-up pace of 8.3% at an annual rate over six months but then reduces its decline to less than 1% than an annual rate over three months. Intermediate goods output falls 4.8% / 12 months and follows at a 10.2% annual rate over six months but then manages to log an increase at a 0.4% annual rate over three months - that marks more of a reversal of trend than it does signal much of A gain. Investment could output falls by 3.9% / 12 months improve slightly by falling at only a 2.4% annual rate over six months and then jumped to a 24.2% annual rate gain over three months, that's a clear sequence of improvement but with most of the improvement coming over three months.

Outside of manufacturing, mining output showed a similar pattern. Mining output fell by 4.4% over 12-months, fell by 6.8% at an annual rate over 6-months, and then logged a 9.1% rate increase over 3-months.

Electric and gas output logs increased over all horizons and showed steady improvement over the sequential periods, rising by 0.8% over 12-months, rising at a 1% annual rate over 6-months, and then at a much-stronger 8.6% annual rate over 3-months.

There's significant agreement across the manufacturing categories and other industrial categories that show that over 3-months something positive is stirring in Japan's economy; but, as yet it's not enough to dominate the existing declining 12-month trend.

In the quarter industrial output is increasing at a9.9% at an annual rate, manufacturing output increases an 11.2% annual rate. However, the manufacturing result is driven by investment goods that are rising at a 30% annual rate in the quarter while consumer goods output falls by 3.6% at an annual rate and intermediate goods output falls at a 0.8% annual rate.

Mining and electric and gas output both fall in the quarter to date, as well. But now the quarter is in a nascent phase with only one month of data in. Results for the quarter can still change quite markedly as there are still two-months-worth of data plus the potential for revision to reveal themselves. The quarter to date growth calculation involves taking the current month and calculating its trajectory over the first quarter average by compounding it; that tends to exaggerate its impact so early in the quarter. That will change significantly when the next several months of data are added in to complete the quarter.

Output overall as well as manufacturing and all its sectors show output levels are still below what they were in January of 2020 when COVID first struck the world economy. The short-falls are significant, indicating that after four years Japan's economy still has not recovered from that body blow. The only industry that has improved relative to January 2020 is electric and gas and that's only because there's always a steady need for the output from utilities. This report highlights the potential for recovery in Japan's economy. Most of the gain stems from a revival in March, April's contribution is that it wasn't weak enough to wipe out the March gain. Still, the year-over-year change in output remains negative. Quarter to date output is stepping into positive territory but on the on the strength of one sector. Japan's economy still has a long way to go to put itself back on two feet.